Placing limits on the amount of new investment undertaken by a firm, either by using a higher cost of capital, or by setting a maximum on the entire capital budget or parts of it.

Capital rationing describes a situation in which a business has only a limited amount of capital to invest in potential projects. As a result, the different possible investments need to be compared with one another in order to allocate the capital most effectively. This is done by evaluating the potential returns that each investment might achieve, and allocating capital to the projects with the best projected returns. (See also payback, net present value, investment appraisal)